FNCE 3400 SmartBook/LearnSmart Chapter 4

A ________ gives someone else the authority to vote a shareholder's shares.

proxy

Public companies usually pay cash dividends on a ____ basis.

quarterly

When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same.

retention

We can estimate the anticipated return on current retained earnings by using the historical _________ _________ _________.

return on equity

A dividend can be paid in the form of cash or ______.

stock

An alternative way to pay out a firm's earnings to shareholders instead of cash dividends is a ___.

stock repurchase

The PE ratio is negatively related to the ______.

stock's risk firm's discount rate

The ex-dividend date is the date

that stock must be purchased before in order to receive a dividend.

A dividend _______ is the amount of the dividend expressed as a percentage of the stock's market price.

yield

If the growth rate (g) is zero, the capital gains yield is ____.

zero

The stock of Boyle Industries is selling for $21 per share and its earnings per share is $3.00. What is Boyle's PE ratio?

7 [Reason: PE ratio = $21/$3.00 = 7]

Dividends received by shareholders are expressed in which of the following ways?

Dividends per share Dividend payout Dividend yield

______ stock has preference in the payment of dividends and during liquidation.

Preferred

Preferred stock dividends

can be deferred indefinitely. may be noncumulative. may be cumulative.

The term ________ stock is usually applied to stock that has no special preference in receiving dividends or in bankruptcy.

common

The date on which the company's board of directors passes a resolution to pay a dividend is called the ______ date.

declaration

In order to receive a dividend, a stockholder must purchase stock before a certain date. That date is called the ___.

ex-dividend date

The ______ can be interpreted as the capital gains yield.

growth rate

The value of a firm is the function of its ______ rate and its _______ rate.

growth; discount

Stock sale price and dividends are

included in the valuation of stock. kinds of cash flows investing in a stock can provide.

A firm with growth opportunities should sell for ____ a firm without growth opportunities.

more than

Which of the following are true?

Firms are indifferent between a stock repurchase and a cash dividend in a perfect market. Given the irrelevance propositions, the increase in EPS that results from repurchase is not beneficial.

Why do no-payout stocks sell at positive prices?

Investors count on future dividends. Investors speculate on capital returns if the firm is sold.

A firm may choose to forgo dividends today if growth opportunities are _____.

high

With cumulative voting

minority participation is permitted. directors are elected all at once.

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?

$20.00 [Reason: P0 = $2/0.10 = $20]

What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (D2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?

$22.73 [Reason: P1= ($5 + 20)/1.10 = $22.73]

What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (D2) is $6, the price for Year 2 (P2) is $40, and the discount rate is 5 percent?

$43.81 [Reason: P1= ($6 + 40)/1.05 = $43.81]

What is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent?

10%

A firm has three open seats on its board of directors and has 10,000 shares outstanding. How many shares must you control to ensure your election to the board if each share receives one vote and voting is cumulative?

2,501 shares [Reason: [10,000/(3 + 1)] + 1 = 2,501 shares. In order to keep you off the board, each of the three seats would have to receive 2,502 votes - 2502 X 3 = 7506. Because there would only be (10000 - 2501)= 7499 votes remaining, you are sure to win one of the seats.]

Which of the following increases the number of shares owned by the shareholders of a firm?

A stock dividend A stock split

Which of these actions do many managers take when they consider the firm's stock to be undervalued?

A stock repurchase

What information do we need to determine the value of stock using the zero-growth model?

Annual dividend amount Discount rate

Which of the following is true about stock dividends ands stock splits?

Both will increase the total number of shares. Both will reduce the share price.

Preferred stock has which of the following features?

Dividend payment preference Preference over common stock in a liquidation

Which one of the following represents valuation of stock using a zero-growth model?

Dividend/Discount rate

A firm can pay out its cash earnings to its shareholders in which of the following ways?

Dividends Share repurchase

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

Which of the following are true of cumulative preferred dividends?

If cumulative preferred dividends go unpaid in a particular year, they will be carried forward as an arrearage. Common shareholders must forgo dividends while preferred dividends are unpaid.

What are the effects of staggering the elections for the board of directors?

Improved continuity on the board of directors Decreased likelihood of a successful takeover attempt Increased prevention of minority shareholder control of the board

Which term applies to the granting of authority by a shareholder to someone else to cast their votes?

Proxy

The determinants of a firm's growth rate include which factors?

Return on retained earnings The retention ratio

Which of the following are cash flows to investors in stocks?

Sale price Dividends

Match the following terms relating to stock valuation. P1 Div1 R P0

Stock price in one year Dividend at end of Year 1 Discount rate Stock price today

Which of the following usually occur with a stock dividend?

The number of shares increase. The price per share falls. No cash leaves the firm.

What is likely to happen to the share price if a company issues a stock dividend?

The price will fall.

What are the three basic patterns of dividend growth?

Zero growth Constant growth Differential growth

Net investment is equal to the total investment minus ____.

depreciation

EBITDA measures earnings before ______.

depreciation interest amortization

With straight voting

directors are elected one at a time. you must have 50% plus one vote to guarantee a seat on the board.

When a payment is made from a firm's earnings to its owners in the form of cash, it is called a _____.

dividend

Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as _______________.

dividends

The constant-growth model assumes that _________.

dividends change at a constant rate

The price earnings ratio is found by dividing the current price per share by its ______.

earnings per share

Which of the following is a reason that an investor should pay a higher price for stock in a firm with growth opportunities than a firm without growth opportunities?

The investor is buying both current income and growth opportunities.

A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.

40 [Reason: Retention ratio = .08/.2 = .4, or 40%]

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is ______ percent.

5 [Reason: ($84/$80) - 1 = 5%]

Which of the following are true of the return on equity?

It is the return on the cumulation of all of the firm's past projects. It can be used to estimate the anticipated return on current retained earnings. It is the return on the firm's entire equity.

The value of a firm is a function of which of the following?

Its discount rate Its growth rate

In a perfect market, which of the following is true?

The firm is indifferent between a stock repurchase and a cash dividend.

As the discount rate increases, the PE ratio ______.

decreases

A net investment of zero occurs when total investment

equals depreciation.

An asset's value is determined by the ____________ value of its ___________ cash flows.

present future

Common stock is generally identified by its lack of special preference in _____.

receiving dividends bankruptcy

A zero-growth model for stock valuation is distinguished by a ____.

constant dividend amount

What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?

$75 [Reason: P0 = $6/(.11 - .03) = $75 Do not multiply the dividend by 1 + the growth rate, because you're given next year's dividend.]

What is the total return for a stock that currently sells for $108, pays a dividend in one year of $3.20, and has a constant growth rate of 3.5 percent?

6.46% [Reason: R = ($3.20/$108) + .035 = .0646, or 6.46%]

Estimates of R should be viewed with a healthy sense of skepticism because the determination of R is highly dependent on g and the estimate of g is based on a number of assumptions. Which of the following are assumptions used in arriving at the estimate for g?

The future retention ratio is equal to the past retention ratio. The return on reinvestment of future retained earnings is equal to the firm's past ROE.

Which of the following are true of dividends?

They are taxable to individual shareholders. They are paid at the discretion of the board of directors.

Which of the following are reasons a firm would prefer a stock repurchase over dividends?

Undervaluation Flexibility Taxes

In order to prevent voting that freezes out minority shareholders, many states have mandatory ______ voting.

cumulative

The dividend yield is determined by dividing next year's expected cash dividend by the ____.

current stock price

The date the firm mails out its declared dividends is called the ___.

date of payment

All else constant, the dividend yield will increase if the stock price ____.

decreases

An asset's value is determined by the present value of its ______ cash flows.

future

Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt _____.

minus cash